United States: How Far Does Your Sexual Abuse Liability Coverage Extend?

If faced with continuous injury claims based on past acts of sexual abuse, will an insured's general liability policies with sexual abuse coverage defend?

TAKEAWAYS

• Purchase insurance that is carefully focused on the risks your company may expect to face—including new products like sexual abuse coverage.
• When faced with claims and especially when a lawsuit is served, immediately notify all liability insurance carriers whose policies might potentially apply.
• Anticipate common coverage defenses, and don't take "No" for an answer.

In recent years, there has been an unfortunate trend of new lawsuits claiming alleged sexual abuse, filed against various institutions or organizations—some religious, some secular—all across the country. A number of states have passed laws relaxing statutes of limitations, so that alleged victims of sexual abuse can bring such claims even if they relate to events which happened decades earlier, when the claimants were vulnerable children. How has the insurance industry responded to these liability claims?

As we have seen in the past, when insurable risks become a headline reality and explode on the scene, the insurers take one of two approaches—sometimes both at the same time: 1) deny coverage and fight even a duty to defend when their insureds tender the claims under the liability policies to seek coverage against such claims; and 2) offer new insurance products against such risks of loss in newly drafted forms.

A relatively recent example of that strategy is the rash of sexual harassment in the workplace claims, followed by (and preceded by) state legislation expressly outlawing such conduct. The insurers then refuse their insureds even a defense, under existing liability policies—followed by the insurers creating and marketing Employment Practices Liability insurance coverages—now a standard commercial policy (with all sorts of conditions, limitations and exclusions.) Given the risks of loss, nearly every business purchases such EPLI policies along with its other liability policies. A win-win for the insurance industry.

That same insurance industry strategy is playing out now in response to the unfortunate wave of sexual abuse litigation across the country. While the insurance industry is stonewalling its insureds seeking even just a defense against these claims under existing liability policies, at the same time the insurers are also selling sexual abuse insurance coverage based on vicarious liability or negligent supervision—new forms as endorsements or as optional coverage in other liability policies. Yet even those cautious organizations that have purchased such coverage will not be guaranteed the insurance company will defend. Often, a coverage lawsuit is the only way to secure coverage.

We have noted the rash of insurance coverage lawsuits filed by policyholders, which seem to appear following earlier reports of sexual abuse lawsuits against such policyholders.

Based on our experience, even those organizations that have the presence of mind to purchase special sexual abuse coverage will face resistance from their insurers. We review here the general outline of these special sexual abuse coverages' terms and conditions. We also review the anticipated coverage defenses insurance companies will likely argue to avoid providing a defense to their insureds. Finally, we review the potentially applicable case law on the broad duty to defend under liability policies which the courts in California and New York have developed to define the broad scope of the duty to defend.

As with all liability policies, these sexual abuse coverages begin with an insuring promise. This pledge is followed by definitions and conditions describing the scope and limitations of the afforded coverage.

I.  Insuring agreement and relevant terms in sexual abuse liability coverage

These policies will provide coverage starting with the promise substantially as follows:

Paragraph 1 of Section II of such policies will have "You are an insured." The policy will likely note that "you" refers to the "named insured," that is, the organization which bought the policy. If the insured is an incorporated organization, it is reasonable to note it can only act, as a corporation, through its executive officers and directors. This is consistent with the "Who is an insured" section in most liability policies.

This insurance applies to "damages" because of "bodily injury" only if:

(1) The "bodily injury" is caused by "abusive conduct that takes in the "coverage territory;"

(2) The "bodily injury" "occurs during the policy period."

While these forms cover bodily injury caused by sexual abuse, they also try to limit exposure by reciting: "Each and every and all ... sexual abuse ... committed by ... or knowingly allowed to happen by one or more persons shall be considered to be one 'abusive conduct' regardless of the number of injured parties; the period of time over which the acts of ... sexual abuse ... took place."

These are generally duty-to-defend forms and provide further that it must be that prior to the policy period "no insured listed under Paragraph 1 of Section II -Who is an Insured (these are executive officers and directors) and no 'employee' authorized by you to give or receive notice of an occurrence or claim, knew that the 'bodily injury' occurred." Thus, if anyone authorized to give notice, or any executive officer or director, knew of the incidents claimed by the claimants, before the first policy period, there would be no coverage.

"Bodily injury" is usually expressly defined as including emotional distress, since that is the injury most such abuse victims will claim to be continuously suffering.

When a lawsuit including claims for sexual abuse is served on the insured organization, it should be immediately tendered to the insurance company. If it is a lawsuit which the insurance company deems potentially expensive to defend, the insured organization should anticipate a fight with its insurer.

II.  The anticipated insurance company excuses for denying coverage

Notwithstanding the absence of support in these policy forms, we suspect insurers will argue their policy is not triggered by a claimant's allegation of sexual abuse, because no abusive conduct occurred during its policy period, their insureds had prior notice, and claims were not timely tendered. Keep in mind these claims are often based on alleged abuses occurring many years earlier, and it is unlikely present management would have any knowledge of any such acts. We can anticipate the insurer will argue that the claimants expressly allege awareness of abusive conduct before the inception of their policies even if no such claims exist anywhere in any records. Finally, a standard excuse will be that the insured did not timely notify the insurance company of the claims (which naturally assumes prior knowledge) even where the insurance company is duly notified as soon as the suit is served.

Most of the time, fortunately, these excuses are easily rebuffed. First, any claim of continuous injury includes injury (emotional distress) suffered during the policy period. Second, it is highly likely that the claimants will not allege specific prior knowledge by the insureds (the nature of these claims is that the wrongdoer is often not properly supervised, after all.) It is highly likely no one had any prior knowledge of these kind of claims. Third, as to this last anticipated excuse, it can be easily met by the insured vigilantly notifying their insurance company as soon as the insureds receive the lawsuit.

In any case, the duty to defend is very broad, and most insurance companies faced with a tender for a defense will likely have such a duty—unless the insurance company can disprove any possible coverage with undisputed facts. A brief review of longstanding insurance coverage law demonstrates these points.

III.  Coverage law in both California and New York will compel a duty to defend whenever there is a potential for coverage—a broad standard

In California, there is a duty to defend wherever there is the merest potential for coverage. Indeed, unless the insurance company can demonstrate undisputed facts barring coverage, the insurer must defend. Montrose Chem. Corp. v. Sup. Crt. (1993) 6 Cal 4^th 287, 295. There may be a duty to defend even if ultimately there is no obligation to indemnify because the ultimate judgment is not covered. Mirpad LLC v. CIGA (2005) 132 Cal App 4^th 1058, 1068. Obviously, the insured does not have to prove the claim against it is valid to get a defense. Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal 4^th 1076, 1088.

Likewise, an insurer's duty to defend under New York law is "exceedingly broad" and must be "construed broadly in favor of the policyholder." Cont. Cas. Co. v. Rapid-Am. Corp., 80 N.Y.2d 640, 648 (1993). The duty to defend arises whenever "the complaint contains any facts or allegations which bring the claim even potentially within the protection purchased." Technicon Elecs. Corp. v. Am. Home Assur. Co., 74 N.Y.2d 66, 73 (1989). As long as any of the claims asserted potentially fall within the policy's coverage, the Insurer has a duty to defend. Frontier Insul. Contrs., Inc. v. Merchs. Mut. Ins. Co., 91 N.Y.2d 169, 175 (1997) ("If any of the claims against the Insured arguably arise from covered events, the Insurer is required to defend the entire action.").

In both California and New York, the duty to defend is based on the facts known at the time of tender, but in California even extrinsic facts can require a duty to defend if they do not eliminate the possibility of coverage. B&E Convalescent Ctr. v. State Comp Ins. Fund (1992) 8 Cal App 4^th 78, 92. In fact a duty to investigate requires a defense if such facts requiring a defense should have been known to the insurer based upon a reasonable investigation. American International Bank v. Fidelity & Deposit Co. of Maryland (1996) 49 Cal App 4^th 188, 195.

The duty to defend arises immediately upon the filing of the underlying complaint, and it will continue to exist until there is a judicial determination that there is no possibility of coverage. Smart Style Indus. Inc. v. Penn. Gen. Ins. Co., 930 F. Supp. 159, 163 (S.D.N.Y. 1996). (Insurer liable for defense costs "from the time that the duty was triggered (i.e., when a complaint alleging facts arguably entitling the Insured to coverage is made) ... .'") (internal citation omitted); Hugo Boss Fashions Inc. v. Fed. Ins. Co., 252 F.3d 608, 620-23 (2d Cir. 2001) (duty to defend "perdures until it is determined with certainty that the policy does not provide coverage") (citing Seaboard Surety Co. v. Gillette Co., 64 N.Y.2d 304, 310-11 (1984).

Unlike California, in determining the duty to defend, New York courts focus principally on the allegations of the complaint itself. The court's function is "to compare the allegations of the complaint to the terms of the policy" to determine whether the potential for coverage exists. A. Meyers & Sons Corp. v. Zurich Am. Ins. Group, 74 N.Y.2d 298, 302-03 (1989). The facts and claims as alleged in the complaint should be construed liberally in favor of coverage. Colon v. Aetna Life and Cas. Ins. Co., 66 N.Y.2d 6, 8-9 (1985) (allegations of the complaint are to be "liberally construed"). Courts should focus on the facts alleged and not the labels applied to the claims in the complaint. See Exeter Bldg. Corp. v. Scottsdale Ins. Co., 79 A.D.3d 927, 929 (N.Y. App. Div. 2010) ("'The nature of [the] claims asserted in [the] complaint [are] to be determined based on the facts alleged and not the conclusions which the pleader draws therefrom or upon the characterization applied to a claim by a party.'") (quoting J. Lucarelli & Sons Inc. v. Mountain Valley Indem. Co., 64 A.D.3d 856, 858 (N.Y. App. Div. 2009)).

New York is generally a "four corners" state: that is, the duty to defend must, in the first instance, be determined based on the allegations of the complaint compared to the coverages afforded in the policy. California courts will consider extrinsic evidence, facts outside of the lawsuit, if those facts raise a potential for coverage.

Conclusion

Even the most cautious and careful insured, when faced with a high-exposure claim in a lawsuit, will likely have to fight with its insurance companies to secure the insurance benefits it has purchased. Of course, providing notice to the insurance company of any lawsuit or claim made against the insured (early and often!) is essential. It is also a comfort to know skillful and knowledgeable policyholder lawyers are available to assist if needed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.